United States stocks sharply lower in fallout from Fed

In a clear reference to the recent turmoil provoked by the downturn in the Chinese economy, the Fed noted that it is “monitoring developments overseas “, even as it said that the risks facing the U.S. economy are still “nearly balanced”. The reason: Unlike the USA central bank, China is “not out of bullets” and “can afford to spend a lot of money”, and its central bank still has leeway to loosen policy.

The world will have to wait for another month, or possibly three months, to see if the Fed raises the rate. Four policymakers now believe rates should not be raised until at least 2016, compared to two who felt that way in June.

“Markets are only anticipating just over a 20 per cent chance of a hike in October and a 40 per cent chance of a hike in December”.

In deciding when to hike rates, the Fed repeated it wanted to see “some further improvement in the labour market“, and be “reasonably confident” that inflation will increase. The greenback slipped to 0.9618 Swiss franc from 0.9695 Swiss franc and dropped to 1.3086 Canadian dollars from 1.3176 Canadian dollars.

The dollar’s decline against the yen hit Japanese stocks hard.

“The Fed has a dual mandate to promote maximum sustainable employment and stable prices“, said Jurrien Timmer, director of global macro strategies at Fidelity Investments. The latest reading was 3.0 percent below the revised July estimate of 1,161,000.

Most traders had expected the markets to breathe a sigh of relief if the Fed held on interest rates this week, but its statements on the economy may have been too pessimistic and spooked the markets.

“The Fed has become more dovish, with growth projections revised down amid rumblings of “secular stagnation”. It is probably warranted, with the USA economy expanding and unemployment levels now in close proximity to the theoretical “natural rate”.

She added that a recent fall in USA stock prices and a rise in the value of the dollar already were tightening financial market conditions, which could slow United States economic growth regardless of what the Fed does.

The U.S. Federal Reserve has decided to keep interest rates steady, reaffirming its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.

In the end, however, they were left with a muddled picture marked by low U.S. unemployment and steady economic growth, but no sign that inflation has begun to rise toward the Fed’s target.